Paying your mortgage early lets you save on interest and cash, making it an ideal choice for some borrowers.
However, an early mortgage payoff isn’t always suitable for everyone. You must assess your financial situation to know if this decision offers benefits.
Whether you plan to pay off your mortgage early or still can’t decide on a strategy, this guide provides several ways to settle your home loan faster and guides you through the process for an early mortgage payoff.
Key Takeaways
- Paying your mortgage early saves on interest and shortens the loan term.
- Strategies include biweekly payments, extra annual payments, and refinancing.
- Downsides include reduced liquidity, lost tax deductions, and missed investments.
- Assess your finances carefully to determine if early payoff benefits you.
Table of Contents
Ways to Settle Your Mortgage Early
Explore these strategies if you haven’t considered how to pay your mortgage balances.
1. Make Payments Biweekly Instead of Monthly
Instead of a full monthly payment, consider making biweekly payments. You will still pay the full monthly amount, but every other week.
Since there are 52 weeks a year, you can make 26 half payments or 13 full monthly payments.
The extra month lets you pay off your entire mortgage bit by bit per year.
For example, let’s say you bought a $350,000 home with a 10% down and financed it with a 30-year fixed mortgage at 7%.
The monthly payment costs $2,095, while the bi-weekly payment is $1,047.50.
If you paid bi-weekly, your total interest payment would be $327,470 with a 23-year payoff period. Meanwhile, paying monthly totals $439,453 for a 30-year payoff time.
The extra payment goes toward your loan’s principal balance, resulting in higher interest savings and a faster payoff.
This accelerated payment strategy suits those who make enough money to pay biweekly or live below their means.
2. Pay Extra Per Year
If you can’t pay bi-weekly, you may save up throughout the year and pay an extra month to make 13 or more payments in a year.
Like bi-weekly payments, paying extra months reduces your principal amount and decreases the time and interest you need to pay your mortgage.
Tell your lender to count it as an extra payment, not an advance payment for the following month.
Consider making extra payments anytime throughout the year if you receive a large sum, like a bonus or tax refund.
3. Refinance Your Loan
When you refinance your mortgage, you take out a new mortgage to pay off the old one.
Refinancing lets you pay for a shorter loan term and a lower rate, allowing you to pay your home earlier.
However, note that your monthly payment will increase despite the lower rate.
If you can’t afford to pay more monthly, this option isn’t for you.
4. Pay Off Your Remaining Balance
If you can pay for the rest of your balance, you may pay in lump sum instead of making additional payments.
This is the quickest and most common way to pay off debt, especially if the homeowner only has a few years left to pay.
However, this isn’t for everyone since you need to pay a large sum.
Consider this if you have saved enough to pay your remaining balance or have gained extra money.
Don’t know where to start?
We offer extensive financial planning and retirement planning services to help you make the best financial decisions possible.
Our team will analyze your situation and help you decide what to pay off – and when – that is best for your financial situation.
The Process of Paying Off a Mortgage Early
If you’re ready to complete your mortgage payment earlier than your term, here’s the general process you need to go through.
1. Review Your Mortgage Terms
Review your mortgage term before paying off your loan to confirm your interest rate and check your loan balance.
Your interest rate will affect your remaining principal balance.
Also, check if your terms include prepayment penalties when you pay your mortgage early.
Some lenders charge a percentage of the loan amount or a certain number of months of interest.
This is crucial as it will affect the amount you pay your lender.
2. Compute How Much to Pay Off
The amount you pay doesn’t just include your remaining balance.
It includes your outstanding principal, the accumulated daily interest, and additional fees, such as prepayment penalties, late fees, and other charges.
Consider using a mortgage payoff calculator to help you calculate and foresee how much you must pay.
To ensure you pay the right amount, ask your lender for an official payoff statement, which breaks down how much you need to pay on a specific date.
3. Choose a Suitable Payoff Date
The date you must pay your mortgage is as crucial as the amount you must settle.
Paying at a certain date allows you to minimize interest and have a seamless payment process.
Consider paying close to your regular payment date to reduce your accumulated interest.
Also, avoid transacting during or near the weekend to avoid delays.
Check with your bank if they have a hold period for large transfers.
Overall, plan your payoff date accordingly for a smooth transaction.
4. Prepare and Transfer Your Final Mortgage Payment
After choosing an ideal payoff date, it’s time to make your final mortgage payment.
However, this phase involves more than transferring your payment.
Be sure to follow your lender’s payment instructions.
Generally, you can pay via check or wire transfer after receiving your payoff quote.
Check the payoff date and transfer the money before the date expires.
Also, when paying by check, ensure that you’re mailing or giving a bank-certified check, not a check from your checkbook.
Finally, double-check all the information you need to transfer or mail your payment.
5. Collect Documents from Your Lender
After successfully paying your final mortgage, your mortgage company will send documents to confirm your payment and release you from your mortgage.
Some of the paperwork you might receive includes:
- A Loan Payoff Letter: This document breaks down what you owe and have paid for. The letter will also indicate if you have paid all your mortgage and other fees.
- A Canceled Promissory Note: You signed this note during closing, promising you’ll pay the entire mortgage. After paying it off, your lender will cancel the promissory note.
- A Deed of Reconveyance: This document transfers the property title from the lender to the homeowner.
- Property Deed: This legal document proves that you are the sole owner after the mortgage company transfers the property title.
- A Certificate of Satisfaction: This paperwork certifies that you have fully paid your debt.
- Escrow Funds: Any amount left in your escrow account should be transferred to your account or sent as a check.
Secure these documents in a folder or deposit box to keep them safe.
6. Update Your Property Documents
After officially paying your mortgage and receiving documents from your lender, update your property and insurance records.
For one, inform your local government that you have paid your mortgage and confirm with them if they have recorded the Satisfaction of Mortgage.
Notify your mortgage insurance about this change, so they can reflect the change of ownership and eliminate the mortgagee clause.
It’s recommended to keep homeowners’ insurance although it’s not mandatory.
Also, let your accountant know you no longer have to deduct your mortgage interest on your tax return.
Finally, ensure your local property taxes will now be sent to you and not your mortgage company.
The Perks of Paying Your Mortgage Early
If you’re unsure if paying your mortgage early is best, consider the following benefits.
- Saving Money: As you pay more of your principal balance, you reduce your interest rate and save more money while shortening your payment period.
- Eliminating Monthly Mortgage Payment: Paying off your mortgage early means you no longer have monthly payments for your loan. You can use your extra money to invest in other opportunities or pay other expenses and debts.
- Tapping Into Your Home Equity: The sooner you pay off your property, the more you can tap into your home equity to make money, in case you need to sell it.
- Peace of Mind: Paying your mortgage completely means you are the sole rightful owner and can no longer lose your home.
The Downsides of Fast Mortgage Payment
Although there are many perks to paying your mortgage early, consider the following disadvantages, too.
- Giving Up Your Property Tax Deduction: Remember that you can’t deduct your mortgage interest from your income tax after paying your mortgage. This can be a huge loss if you have a high-income tax rate.
- Reducing Your Liquidity: Real estate is a non-liquid asset since it can take years to produce money by selling or renting it out. Putting most of your money on your property can significantly reduce your on-hand cash, especially during emergencies.
- Missing Out on Investment Opportunities: Using your extra money on your mortgage can be a missed chance to invest it in other financial goals and opportunities.
Common Mistakes to Avoid Before Clearing Your Mortgage Debt
Consider the following factors before settling your mortgage early.
- Paying Off a Mortgage Before a Recession: Check the current and forecasted economy before putting most of your money into your property. If the economy hits a recession, your cash is more valuable as an emergency fund than extra mortgage payments.
- Not Reading the Fine Print: Paying off your mortgage early can have consequences if your loan terms include a prepayment penalty. Review your home loan carefully to check for any charges and see if you can pay them.
- Not Having Enough Savings: Consider building an emergency fund before paying off your mortgage to ensure you have enough cash in case of an economic crisis or a few months of unemployment.
When Should You Pay Off Your Mortgage Loan?
The right time to pay your loan depends on your current financial situation and goal.
Ideally, paying off your mortgage should have more benefits for you both in the long and short term and shouldn’t hurt you financially.
Ultimately, assess your finances carefully and consider all factors to make a suitable decision.
You may also ask a financial advisor to help you evaluate your situation and identify the best approach.
Should You Pay Off Your Mortgage Early?
If you can pay your mortgage without sacrificing your current and future finances, then pay your mortgage early. Otherwise, consider holding off on settling your loan.
If you need help assessing your current financial situation and taking steps to pay off your mortgage, manage your finances, and grow your wealth, consider seeking help from a financial advisor.
Physicians Thrive offers financial, legal, career, and investment services to help medical professionals achieve financial independence. Speak to our Financial Advisors today to plan your future!